Whether the Separation Pay under a Special Redundancy Program is Exempt from Income Tax and Consequently from the Withholding Tax

July 3, 1992 BIR RULING NO. 197-92 28 (b) (7)(B) 164-91 197-92 Agchem Manufacturing Corporation 8th Floor, Liberty Building Pasay Road, Legaspi Village Makati, Metro Manila Attention: Mr . Jose V . Cruz Manager Gentlemen : This refers to your letter dated March 19, 1992 requesting for a ruling as to whether the separation pay which your employees will receive under your Special Redundancy Program is exempt from income tax and consequently from the withholding tax. prcd It is represented that your company is engaged in the manufacture of 2, 4Dichloro-phynoxy Acetic Acid, a herbicide used to control weeds in ricefields, sugar can fields, etc,; that it has decided to close its 2,4-D acid production section last January 30, 1992; that it opted instead to import said product from the international market; that it decided to offer a redundancy program to all those affected personnel; that those affected will be given a special separation package as follows: (a) thirty (30) days pay for every year of service inclusive of retirement plan benefits; and, (b) a pro-rated 13th-month pay and payment of unused vacation and sick leave credits. In reply, please be informed that pursuant to Section 28 (b) (7) (B) of the Tax Code, as amended, any amount received by an official or employee or his heirs from his employer as a consequence of separation by such official or employee from the service of the employer due to death, sickness and physical disability or for any cause beyond the control of said official or employee is exempt from taxes regardless of age or length of service. The phrase "for any cause beyond the control of said official or employee" connotes involuntariness on the part of the official or employee. The separation from the service of the official or employee must not be asked for or initiated by him. The abovementioned law requires the presence of these two (2) conditions in order that the employee benefits may be granted tax exemption: (1) the employee is separated from the service of the employer due to death, sickness or other physical disability or for any cause beyond the control of said official or employee; and, (2) the employer pays benefits to the official or employee or his heirs is a consequence of such separation. Since the separation of your employees under the Special Redundancy Program is beyond their control, any and all amounts received by them as a result thereof, are exempt from all taxes and consequently, from the withholding tax prescribed by Section 72, Chapter X, Title II of the Tax Code, as amended by Batas Pambansa Blg. 135 and implemented by Revenue Regulations No. 6-82, amended. Such exemption is understood not to include the company's payment of salaries, pro-rated 13th month pay and cash equivalent of accumulated vacation or sick leaves, if any. LLpr Very truly yours, JOSE U. ONG Commissioner of Internal Revenue